In re Candor Diamond Corp., Bankruptcy No. 81 B 11594

• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
• Writing for the Court: TINA L. BROZMAN
• Citation: 68 BR 588
• Parties: In re CANDOR DIAMOND CORP., Debtor. Daniel McCOLLEY, Trustee of Candor Diamond Corp., Plaintiff, v. NAVARO GEM LTD., Defendant.
• Docket Number: Adv. No. 82-5589A.,Bankruptcy No. 81 B 11594
• Decision Date: 11 December 1986

68 B.R. 588 (1986)

In re CANDOR DIAMOND CORP., Debtor.
Daniel McCOLLEY, Trustee of Candor Diamond Corp., Plaintiff,
v.
NAVARO GEM LTD., Defendant.

Bankruptcy No. 81 B 11594, Adv. No. 82-5589A.

United States Bankruptcy Court, S.D. New York.

December 11, 1986.

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Stroock & Stroock & Lavan by Jay Fialkoff, Robin E. Keller, New York City, for trustee.

Sherman, Citron & Karasik, P.C. by Howard Karasik, New York City, for Navaro Gem. Ltd.

TINA L. BROZMAN, Bankruptcy Judge.

This preference action arises out of the notorious Candor Diamond Corp. (Candor) bankruptcy. After stipulating with the defendant, Navaro Gem, Ltd. (Navaro) as to the transactions which occurred between it

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and Candor, Candor's bankruptcy trustee (Trustee) rested, relying on the presumption of insolvency.¹ Navaro contends, among other things, that the Trustee has failed to carry his burden of proof on the issues of insolvency and the distribution which Navaro would have received from the bankrupt estate. For the reasons which follow, we hold that the Trustee has indeed proven that the transfers were preferences

FACTS

Prior to its bankruptcy, Candor had been engaged in the business of buying and selling loose gems and manufacturing and selling jewelry. On August 10, 1981, there was filed against it an involuntary petition in bankruptcy. An order for relief was entered on November 9, 1981 and Daniel McColley was later appointed as trustee. He seeks to recover from Navaro payments made by Candor to Navaro for gems which Candor purchased. At trial, the parties stipulated to the following facts:

(1) On December 3, 1980, Navaro sold and delivered gems to Candor worth $39,055, for which Navaro received fifteen promissory notes. Four of those notes were paid within the preference period, on May 13, May 19, May 28 and June 6, 1981 in the respective amounts of $3,000, $3,000, $3,000, and $3,055 (the "First Transaction").

(2) On March 27, 1981 and January 28, 1981, Navaro sold and delivered gems to Candor worth $1,536.45, for which Navaro received Candor\'s check dated June 4, 1981 in that amount ("the Second Transaction").

(3) On April 1, 1981, Navaro sold and delivered gems to Candor worth $61,391.75, for which Navaro received three promissory notes in the respective amounts of $22,275, $28,500 and $10,616.75. These notes were paid, respectively, on June 3, 1981, July 3, 1981, and August 3, 1981 (the "Third Transaction").

(4) On May 7, 1981, Navaro sold and delivered gems to Candor worth $8,855, for which Candor paid by check dated July 31, 1981 (the "Fourth Transaction").

Navaro admits that the payments set forth above constituted payment in full of all debts owed by Candor to Navaro.

It was at this point when the Trustee obtained Navaro's agreement that he rested. Navaro, however, called two witnesses. The first was Shane Yurman (Yurman), a certified public accountant with the firm of W.H. Freedman & Company, the former accountants for Candor. The other was Sam Navaro, Navaro's president.

Yurman testified that he supervised the preparation of a review report of Candor consisting of unaudited financial statements for the period ending November 30, 1980 (some eight and one-half months prior to the filing of the involuntary petition). The letter accompanying the financials was dated May 5, 1981. The balance sheet reflected total assets of $1,629,847² and liabilities of $1,419,562. All of the information used to prepare the financial statements was derived, directly or indirectly, from Margolies and the late Margaret Barbera, Candor's bookkeeper.³ As is standard with a review report, the accounting firm did not actually examine the inventory and did not verify the existence of the accounts receivable which, together, constituted approximately half of Candor's assets. Whatever undescribed tests were made of those assets were purely mathematical

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computations. Yurman further testified that before issuing the financial statements his firm inquired of management whether any events had occurred subsequent to November 30, 1980 which would materially affect the statements. None was revealed

Sam Navaro testified that Candor generally paid his company with promissory notes which Navaro discounted with Bank Leumi. With the Second and Fourth Transactions, however, the practice was varied, Candor paying Navaro directly by check.

In addition to eliciting the testimony previously described, Navaro's counsel introduced into evidence six pages from the Trustee's deposition in which he testified that he had collected $718,112.58 in assets, of which $186,723.00 was in escrow pending resolution of litigation with a third party; that he had a "six million plus" claim against Margolies and his wife on which no suit had yet been brought; that Candor's factor filed a claim for $5,669,394.98 and that the other unsecured creditors have claims of under $500,000.00. The other portions of the deposition were not offered in evidence.

At the conclusion of Navaro's case, the Trustee's counsel sought to rebut Navaro's evidence by introducing Margolies' allocution in the district court at which he pleaded guilty to bankruptcy fraud. This was sought under Fed.R.Evid. 803(24), which requires that the proponent make known to the adverse party in advance of the trial the intention to use the hearsay statement. Because counsel conceded that that notice had not been given, Judge Ryan declined to admit the allocution.

DISCUSSION

Navaro initially challenges this court's jurisdiction to hear and determine the Trustee's action. That dispute has long been resolved in favor of jurisdiction. See 28 U.S.C. § 157(b)(2)(F); In re Kaiser, 722 F.2d 1574 (2d Cir.1983); In re Lion Capital Group, 44 B.R. 690 (Bankr.S.D.N.Y. 1984). We turn, therefore, to the merits of the Trustee's action.

Preliminarily, we note that the Trustee has the burden of proving by a preponderance of the evidence all of the elements rendering the transfer avoidable under 11 U.S.C. § 547.⁴ First Potter County Bank v. Hogg (In re Hogg), 35 B.R. 292, 294 (Bankr.D.S.D.1983); 11 U.S.C. § 547(g). Here, Navaro denied all of the elements, putting the Trustee to his proof.

1. TRANSFER

The Second and Fourth Transactions involved payments by check which, indisputably, constitute transfers. 11 U.S.C. § 101(40); In re Duffy, 3 B.R. 263, 265 (Bankr.S.D.N.Y.1980). The First and Third transactions involved satisfaction of the notes discounted by Bank Leumi. Payment of each of the notes constituted a transfer for "it is well settled that it is not the mere giving of a note by the debtor to his creditor, but rather . . . the payment thereof within the 90-day period that effects

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the preference." 4 L. King, Collier on Bankruptcy ¶ 547.15 at 547-56 n. 1 (15th ed. 1986) and cases cited therein

2. TO OR FOR THE BENEFIT OF A CREDITOR

Navaro urges that because the notes were discounted prior to the preference period, it was not the recipient of Candor's payment and the transfers were not to or for the creditor's benefit. We reject that argument, however, because the discounting did not alter Navaro's continued position as creditor of the note's maker. See generally In re Lyon, 121 F. 723 (2d Cir.1903); 11 U.S.C. § 101(9). As an endorser of the notes, Navaro was a creditor under the Bankruptcy Code holding a contingent claim against the debtor. Payment of the notes eliminated Navaro's liability to Bank Leumi and, in turn, Candor's liability to Navaro. Thus, assuming all other elements are met, the payments constituted preferences. McColley v. Matmon Gem Co., Inc. (In re Candor Diamond Corp.), 44 B.R. 195, 198 (Bankr.S.D.N.Y. 1984); 4 L. King, Collier on Bankruptcy, ¶ 547.18 at XXX-XX-XX (15th ed. 1984).

3. FOR OR ON ACCOUNT OF AN ANTECEDENT DEBT

Clearly the Second and Fourth transactions, where checks were issued, were on account of antecedent debts because the checks were issued months after the gems were sold and delivered. The use of notes in the First and Third transactions does not, however, as Navaro urges, render them substantially contemporaneous. Even if the notes were given upon delivery of the goods (the parties have only stated when the notes were paid), the contemplated delay inherent in payment of a note renders the exchange one which is not contemporaneous. In re Candor Diamond, supra, 44 B.R. at 197. The lack of contemporaneity is particularly evident here where the notes were paid months after the goods were delivered. Thus, all the transfers at issue were on account of antecedent debts.

4. WHILE THE DEBTOR WAS INSOLVENT

Under section 547(f), the debtor is presumed to be insolvent during the 90-day preference period. That presumption, as mandated by Fed.R.Evid. 301 made applicable in bankruptcy proceedings by Fed.R. Bankr.Pro. 9017, "requires the party against whom the presumption exists to come forward with some evidence to rebut the presumption, but the burden of proof remains on the party in whose favor the presumption exists." H.Rep. No. 95-595, 95th Cong. 1st Sess. 375 (1977), U.S.Code. Cong. & Admin.News 1978, pp. 5787, 6331; See 4 L. King, Collier on Bankruptcy ¶ 547.26 at 547-109 (15th ed. 1985); In re Emerald Oil Co., 695 F.2d 833 (5th Cir. 1983); Keydata Corporation v. Boston Edison Co. (In re Keydata Corp.), 37 B.R. 324, 327 (Bankr.D.Mass.1983). Specifically, "the burden of proof in the sense of the risk of nonpersuasion remains on the party in favor of whom the presumption operates." Clay v. Traders Bank, 708 F.2d 1347, 1351 (8th Cir.1983).

Several courts have explored what exactly constitutes "some evidence" rebutting the insolvency presumption. In Keydata Corp. the court found the defendant did not meet its burden of coming forward with some evidence where the defendant showed only that the debtor was current on its bills but not that the value of the assets exceeded that of the liabilities. Id. 37 B.R. at 327. Again, the...